In the empirical literature, several studies have gone beyond the conventional debt sustainability analysis in various ways. This has been done by extending the scope of conventional debt analysis (based on the inter-temporal budget constraint in a static environment) to account for fiscal and economic behaviour in response to shocks (sensitivity analysis), fiscal vulnerabilities (stress-testing exercise) and short-term refinancing risks. The interaction of key variables driving debt dynamics is also factored in debt sustainability exercises. There are other studies which have used a more comprehensive concept of debt, covering not only explicit liabilities but also contingent, implicit and off-budget liabilities
After having examined the debt sustainability issue, based on indicator-based approach, inter-temporal budget constraint exercise and fiscal policy response function of states in the earlier sections, an attempt has been made to examine the impact of contingent liabilities on debt/fiscal sustainability of states in India. Article 293 (1) of the Constitution of India provides that a state government can give guarantees within such limits as may be fixed by the State legislature on the security of the Consolidated Fund of the State. Guarantees issued by states are considered as contingent liabilities on the Consolidated Fund of the State in case of default by the borrower for whom the guarantee is extended. The state governments have generally been conservative in the issuance of guarantees (in respect of loans raised by government departments, public sector undertakings, local authorities, statutory boards and corporations, and co-operative institutions) and follow certain norms, whether stipulated under the State Government Guarantees Act or FRBM Acts/FRLs of states or administrative limits fixed for issuance of guarantees. Under these enactments, limits are fixed on annual incremental guarantees as ratio to GSDP or total revenue receipts (Appendix III). Apart from the differences across states in terms of guidelines relating to guarantees, there are also sharp differences when it comes to awareness about fiscal risk linked to issuance of these guarantees and the state level efforts to reduce outstanding guarantees as a policy initiative.
The guarantee commitments of state governments in respect of state public sector enterprises (SPSEs) have recently emerged as a major source of potential risk to fiscal and debt sustainability at the state level. While the need for issuance of guarantees to SPSEs arose
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after 1993-94, when the practice of allocation of a separate share in market borrowings to these enterprises was discontinued, it assumed further importance in the wake of declining budgetary support to these enterprises for meeting their capital requirements. As borrowing requirements of these entities increased, these were backed by issuance of guarantees in several states, resulting in an increase in explicit contingent liabilities of these states. This problem is more acute in those states, which have not enacted any law or framed any rules for fixing the ceiling on guarantees to be given by the state government. On the other hand, there are a few states (Odisha) which have exercised due precaution in putting in place rules to avoid the spill-over effect of these guarantees to State budgets.
The unbridled growth in guarantees issued to SPSEs, which have large outstanding debt and are also incurring losses, have increased vulnerability of these enterprises with fiscal implications for the state governments. This is evident from the data relating to outstanding debt and accumulated losses/ profit of SPSEs at end March 2015 (Table 10). In some states, the outstanding debt of SPSEs is of much larger magnitude than outstanding guarantees issued to these undertakings. On top of this, many SPSEs have accumulated huge losses, which indicate their poor debt-servicing capacity entailing the risk of default in future.
Table 10: Outstanding Debt, Guarantees and Accumulated Profit/Losses of State PSUs in-end March 2015
(Amount in ` crore) State Outstanding Debt Outstanding
Guarantees
Accumulated Profit/Loss
1 2 3 4
Andhra Pradesh 52983.6 7581.34 -10812.19
Assam 2783.52 Nil -3658.21
Bihar 11693.27 3732.97 -3137.76
Chhattisgarh 13602.11 744.73 -4780.58
Gujarat 42509.05 1652.82 3721.00
Haryana 37847.90 28746.85 -24043.86
Himachal Pradesh 6568.11 2746.24 -2951.26
Jammu & Kashmir 4429.09 2574.78 -2907.29
Jharkhand 7736.75 Nil -16755.73
Karnataka 32086.94 7251.35 731.66
Kerala 8912.96 5579.21 -198.94
Madhya Pradesh 37178.92 8958.90 -29597.25
Maharashtra 54477.66 2540.30 -9071.83
Manipur 3.05 Nil -74.74
Meghalaya 1310.44 758.18 -576.93
Mizoram 30.93 18.61 -58.03
Nagaland 61.66 15.00 -49.35
Odisha 7503.98 2001.37 2763.57
Punjab 14597.07 49058.42 -6236.66
Rajasthan 74747.68 90054.11 -83732.89
Sikkim 273.25 109.50 -117.72
Tamil Nadu 62044.08 16951.26 -38233.61
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Telangana 50969.43 15249.51 -15343.59
Tripura 245.56 Nil -634.48
Uttar Pradesh 88850.29 59822.93 -94151.70
West Bengal 23604.19 8060.49 -190.07
Note: 1. Data relating to Odisha, Mizoram and Nagaland pertain to 2013-14 and those relating to Tamil Nadu to the year 2012-13.
Source: Comptroller and Auditor General of India (CAG)
A state-wise picture of outstanding liabilities and guarantee commitments including guarantees issued to power sector companies is given in Appendix IV. While the guarantees outstanding as a per cent of outstanding liabilities of all states was around 16.1 per cent in end March 2015, it exceeded the all-states average in eight states. Power sector’s share was the largest in total guarantees outstanding, with power sector in nine states having a share of more than 80 per cent. In fact, the fiscal risk associated with guarantees issued to power sector has repeatedly been experienced since the early 2000s. In 2001, the burden of clearing outstanding dues of state electricity boards to central public sector undertakings was taken over by state governments through issuance of power bonds amounting to ` 29,606 crore.
The accumulated losses of all power distribution utilities (DISCOM) were estimated at ` 1.90 lakh crore as on March 31, 2011 (Expert Group on Financial Health of State Distribution Utilities; Chairman: Shri B K Chaturvedi), requiring another financial restructuring plan (FRP) (October 5, 2012) involving take-over of outstanding short-term loans as of March 31, 2012 to the extent of 50 per cent by the respective states under this plan. The accumulated losses of DISCOMs in the country subsequently increased to approximately `3.8 lakh crore as on March 31, 2015, despite the implementation of FRP in select states where the situation was critical. In 2015-16, the Central government announced a new Scheme viz., Ujwal Discom Assurance Yojana (UDAY) for the purpose of financial and operational restructuring of the state power distribution companies (DISCOMs). As on January 9, 2017, 15 states2 have already signed MoUs to take over 75 per cent of outstanding debt of their DISCOMs under the UDAY over a period of two years (and in some cases in five years) adding to their liabilities and involving additional interest expenditure over a period of ten years (Appendix V). Furthermore, these states are also expected to fund the future losses, if any, of DISCOMs in a graded manner and this liability could be as high as 50 per cent of the previous year’s loss in the year 2020-21. As on January 9, 2017, the participating states have already taken over debt liability of DISCOMS to the tune of ` 1.82 lakh crore, i.e., around 42 per cent of
2In addition, 6 states have signed MoUs to bring about an improvement in operational efficiency of their DISCOMs.
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total outstanding debt of DISCOMs, estimated at ` 4.3 lakh crore as at end-September 2015.
It is, therefore, imperative that the underlying operational efficiency parameters3 are achieved within the stipulated time frame to bring about a turnaround in financial position of DISCOMs and to avoid state government participation in such restructuring exercises in future, which may assume crisis proportion.
Majority of the states are yet to implement the recommendation of the Group of State Finance Secretaries on the Fiscal Risk on State Government Guarantees (2002) that appropriate risk weights be assigned to guarantees given by states on the basis of probability of devolvement of guarantees, and adequate budgetary provisions be made for honouring these guarantees in case they devolve on the states. The Group had in fact gone a step further by recommending that “guarantees in regard to liabilities which are clearly intended to be met out of budgetary resources should be treated as equivalent to debt.” In case, we take outstanding liabilities of states along with their PSUs, the position of some states turns out to be quite alarming on the back of accumulation of losses of PSUs in these states (Appendix VI).
VIII: Conclusion
In this paper, the debt sustainability of state governments in India was assessed through indicator-based analysis as well as empirical exercises. The indicator-based analysis revealed that while most of the debt sustainability indicators showed significant improvement during 2004-05 to 2015-16 compared to the earlier phase (1997-98 to 2003-04), debt repayment capacity and interest burden indicators lagged behind their respective performance levels achieved during 1981-82 to 1991-92.
The estimation results based on a panel data framework covering 20 Indian states for the time period 1980-81 to 2015-16 revealed that there is a cointegrating relationship between government revenues and expenditure in India, which tantamount to satisfying the inter-temporal budget constraint. Moreover, the estimated fiscal policy response function showed that the primary balance position of Indian states responds in a stabilising manner to the increases in debt. Thus, both the results indicate that the current debt situation at the state level is sustainable in the long run.
3 These include reduction of AT & C loss to 15 per cent by 2018-19; reduction in gap between average revenue realised and average cost of supply of power to zero by 2018-19; and almost all DISCOMs to be profitable by 2017-18 and 3-4 by 2018-19.
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Disaggregated level analysis, however, revealed that despite an overall improvement in debt position of the Indian states, some of the states have not been able to achieve their respective FC-XIII targets. Going forward, there are several developments with a bearing on debt/fiscal sustainability of states in India. First, the committed liabilities of states may increase in case they decide to implement the Seventh Pay Commission Award, even as some of them have their own pay panels. Second, the interest liabilities of states that have participated in financial restructuring of DISCOMs would increase besides additional provision to be made by them for extending financial support to these utilities in case they continue to incur losses in future as spelled out in MoUs signed by them. Third, the guarantees given to other SPSEs in some states, which are also loss-making entities, could also give rise to financial burden on the states. These dimensions would assume importance in case there is any deviation from the extant institutional arrangement for management of state government debt.
Overall, the conventional debt sustainability analysis, as attempted in this paper, shows that debt position of states at the aggregate level is sustainable. While we have not analysed the implicit liabilities (linked to PPP projects and unfunded liabilities related to pension), our paper highlights that the explicit contingent liabilities linked to guarantees given by the state governments have assumed significance in the context of debt sustainability exercise at the state level. Given this, any debt/fiscal sustainability exercise, based only on outstanding liabilities of states does not provide a realistic assessment of the situation at the individual state level. We would like to conclude with an observation of the RBI Group which was set up to assess the fiscal risk of State Government Guarantees (2002) that
“in order to have a norm in terms of debt sustainability the underlying guarantees can be mapped out and likely amount of devolvement could be estimated for future years. The total of such likely devolvement during the life of the guarantees could then be treated as normal debt and clubbed together with debt obligations. Together, the liability could be measured as a ratio of SDP to ensure that debt plus likely devolvement on guarantees during its life is sustainable and to ensure that guarantees are also captured in such measures”.
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Appendix I: List of States
1. Andhra Pradesh 2. Assam
3. Bihar 4. Gujarat 5. Haryana
6. Himachal Pradesh 7. Jammu & Kashmir 8. Karnataka
9. Kerala 10.Maharashtra 11.Manipur 12.Meghalaya 13.Madhya Pradesh 14.Odisha
15.Punjab 16.Rajasthan 17.Tamil Nadu 18.Tripura 19.Uttar Pradesh 20.West Bengal
Appendix II: Results of the Hausman Test for Correlated Random Effects
Test Summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.
Model 1
Cross-section random 49.43 3 0.00
Model 2
Cross-section random 53.28 4 0.00
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Appendix III: Limits on Guarantee Set in Fiscal Responsibility and Budget Management Acts*
or other legislations of States
State Guarantees
Act Stipulated Limits Guarantee
Redemption Fund
The amount of annual incremental risk weighted guarantees to be limited to 90 per cent of the total revenue receipts in the year preceding the current year.
GRF set up in
The State to be conservative in giving guarantees. GRF not yet set up
Assam Administrative ceiling (2000) Assam FRBM Act, 2005
The ceiling on guarantee issued by the state government was fixed at ` 1,500 crore.
Government guarantees to be restricted at any point of time to 50 per cent of State's own tax and non-tax revenues of the second preceding year, as reflected in the books of accounts maintained by the Accountant General.
GRF created vide notification dated September 15, 2009
Bihar Bihar FRBM Act, 2006
No stipulation relating to guarantees in the Act. GRF not yet set up
Chhattisgarh Chhattisgarh FRBM Act, 2006
Outstanding guarantees at the end of the year should not exceed 1.5 per cent of GSDP.
GRF not yet set up
Goa The Goa State
Guarantees Act, 1993
The Government should cap the total outstanding guarantees within the specified limit under the Goa State Guarantees Act, 1993. The Goa legislature had fixed a limit of ` 800 crore on the outstanding guarantees in March 2005.
Set up GRF during 2003-04
Gujarat The Gujarat Sate Guarantees Act, 1963
The Government should cap the total outstanding guarantees within the limit provided in the Gujarat Sate Guarantees Act, 1963. The State legislature decides such limits from time to time. With effect from March 2001, the limit for the total outstanding guarantees is ` 20,000 crore
Set up GRF in 1963
Haryana Haryana FRBM Act, 2005
Does not contain any provisions for limiting the guarantees given by the State Government.
The total outstanding guarantees should be limited to 40 per cent of revenue receipts for the year preceding the current year.
The Act limits the amount of annual incremental risk weighted guarantees to 75 per cent of the total revenue receipts in the year preceding the current year or at 7.5 per cent of GSDP of the year preceding the current year, whichever is lower.
No guarantee policy has been framed. GRF not yet set up
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The Act prescribes that the total outstanding guarantees as on the April 1 of any year shall not exceed eighty per cent of the State's revenue receipts of the second preceding year as in the books of the Accountant General of Karnataka.
Under the Act, the state government is required not to give guarantee for any amount exceeding the limit stipulated under the Karnataka Ceiling to Government Guarantees Act, 1999
Under the Act, the Government guarantees as on the 1st day of April of any year shall not exceed ` 14,000 crore.
GRF not yet set up
Madhya Pradesh
Madhya Pradesh FRBM Act, 2005
The State Government shall limit the annual incremental guarantees so as to ensure that the total guarantees do not exceed 80 per cent of the total revenue receipts in the year preceding the current year.
GRF set up in January 2006
Maharashtra Maharashtra FRBM Act, 2005
The Act does not contain any provision for limiting the guarantees given by the State Government.
GRF not yet set up
Manipur The Manipur Ceiling on State Government
Manipur The Manipur Ceiling on State Government